2021 (7) TMI 1468 - HC - Indian Laws

Bank validly withdrew settlement offer after borrower failed to meet payment deadlines under agreed terms

Karnataka HC ruled that a borrower's failure to adhere to One Time Settlement terms justified the bank's withdrawal of the OTS offer. The court held that ... Borrower's failure to adhere to the One Time Settlement (OTS) terms justifies the bank's withdrawal of the OTS offer - validity of the bank's actions in rescinding the OTS offer and proceeding with the auction of the mortgaged properties - doctrine of promissory estoppel. Legal position as to OTS Scheme - HELD THAT:- The loan transactions entered into between the Bank and borrower are essentially a matter of contract, is undisputable; even then, the extant RBI Guidelines under which the OTS Schemes have been evolved, regulate the repayment of loans as per the terms agreed; the Public Sector Banks being the instrumentalities of 'State' under Article 12 of the Constitution, their actions/inactions even when filled with contractual elements, are liable to suffer a restrictive judicial scrutiny under Articles 226 and 227, depending upon the facts and circumstances of each case, is also true. Foundational facts emerging from record - HELD THAT:- The borrower vide letter dated 13.03.2020 had sought for elongation of stipulated period of payment up to 31.05.2020; the bank vide letter dated 30.05.2020 rescinded the OTS facility, the agreed amount not reaching its hands in terms of OTS. The borrower vide representation dated 26.06.2020 requested the bank to withdraw the aforesaid Rescinding Letter dated 30.05.2020 stating that minimum 45 days were required for assignment of debt and that he would pay interest on the delayed payment, as well; the bank declined and went ahead with the coercive acts of recovery since the conduct of the borrower did not generate confidence. Recovery of debts - HELD THAT:- The OTS offers have been made by the borrower thrice; he was accorded consent by the Bank to the assignment of loan to the company in question subject to the rider that the timeline for payment in terms of OTS would not be altered; the loan transaction essentially being a matter of contract, the OTS- like-arrangement is only a novatio and a new arrangement is brought about by the bargain of parties namely the lender, the borrower and the surety, done across the table; that being the position, ordinarily, the Courts cannot alter the terms of contract even when it has statutory elements; the time within which the remittance of the amount has to be made is an essential term of OTS, disentitles the defaulting borrower from invoking the writ jurisdiction. Locus standi of surety to maintain appeal - HELD THAT:- It is not that the borrower was not aware of surety's representation dated 12.02.2019 in which he had stated inter aha about the subject mortgaged property being capable of fetching the auction price much higher than the sums stated in the OTS offers; after all the surety has also a stake in the loan transaction and he cannot escape the liability; that being the position, the principal borrower in all fairness ought to have arraigned him as a respondent to the writ petition; that having not been done, he is not justified in opposing surety's request for the grant of leave to file the writ appeals; added to this, the borrower did not avail the opportunity of revising his OTS offer; therefore, we granted the leave as sought for and heard the appeals on merits. Locus standi of auction purchaser - HELD THAT:- The learned single Judge vide ad interim order dated 24.03.2021 had, in a sense, permitted auctioning of the property by restraining the confirmation of contemplated auction sale; auction purchaser had also sought for his impleadment in the writ petition; the e-auction was held on 08.04.2021 (presumably being unaware of the disposal of the writ petition on 06.04.2021) and the highest bid of Rs. 15,00,52,000/- of the appellant in Writ Appeal No. 100103/2021 came to be accepted; he has also paid Rs. 78 lakh on 05.04.2021 being the pre-deposit for participation in the auction; he has also remitted Rs. 2,97,13,000/- on 09.04.2021; that apart, he has now come forward with a very high offer of Rs. 25,20,99,999/-; this is much higher than the revised OTS offer of the borrower i.e., Rs. 15,20,00,000/-; the borrower despite giving the same opportunity as was given to the appellants herein, declined to improve his offer figure; when the public money is involved, a Writ Court has to scrutinize the things with objectivity and ensure that no loss of such money takes place. Therefore, leave is granted for maintaining the appeal. Loan transaction - breach of OTS - HELD THAT:- The equity and fairness required of a Public Sector Banks cannot be carried too far and to an unrealistic extent of disabling or delaying the very recovery of the public money which they have lent; while not insisting upon the borrower to honour the OTS commitment undertaken by him, the Banks alone cannot be shackled hand and foot by invoking the doctrine of promissory estoppel - a Writ Court has to assume a realistic role of a trustee in ensuring that the public money is not lost in the conundrums of constitutional contentions; Courts have to have a pragmatic approach when matters touching economics are brought before them for adjudication. Suspicious conduct of bank officials - HELD THAT:- Strangely the mortgaged property was auctioned on 08.04.2021; the highest bid of Rs. 150,052,000/- of the appellant auction purchaser came to be accepted; the very same buyer has revised the bid to Rs. 252,099,999/- before us; even the surety has come up with an offer of Rs. 23 crore; the OTS deal struck between the bank and the borrower in a small sum of Rs. 150,052,000/- raises a strong suspicion as to there being some 'shady deal' with the connivance of authorities of the bank; this needs to be investigated into by the Reserve Bank; matter merits attention of the Comptroller and Auditor General of India, as well. Conclusion - i) Judicial intervention in banking matters was deemed limited to cases of statutory violations or manifest unfairness. ii) The lender bank shall accept the revised offer of the appellant auction-purchaser in a sum of Rs. 25,20,99,999/- only; he shall remit the remainder of the said amount within a period of six weeks failing which, the amount which he has already deposited shall stand adjusted to the credit of the principal borrower. iii) The court ordered an investigation into potential misconduct by bank officials, reflecting concerns over the handling of the OTS and auction processes. Appeal allowed in part. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the borrower's failure to adhere to the One Time Settlement (OTS) terms justifies the bank's withdrawal of the OTS offer.The validity of the bank's actions in rescinding the OTS offer and proceeding with the auction of the mortgaged properties.The applicability of the doctrine of promissory estoppel in favor of the borrower.The locus standi of the surety and the auction purchaser in challenging the single judge's decision.The role of judicial intervention in contractual matters involving public sector banks and borrowers.The implications of potential misconduct by bank officials in handling the OTS and auction processes.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Borrower's Non-Compliance with OTS TermsLegal Framework: The OTS schemes are governed by guidelines issued by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949, which require strict adherence to timelines for payment.Court's Interpretation: The court emphasized that OTS schemes are statutory concessions and require compliance with agreed terms, including timelines.Key Evidence: The borrower failed to remit the agreed OTS amount by the stipulated deadline, leading to the bank's withdrawal of the offer.Application of Law: The court held that the borrower's failure to comply with the OTS terms justified the bank's actions in rescinding the offer.Competing Arguments: The borrower argued for an extension based on promissory estoppel, but the court found this unpersuasive given the contractual nature of the OTS terms.Conclusion: The borrower's non-compliance with the OTS terms invalidated their claim for relief under the writ petition.Issue 2: Validity of Bank's Actions and Auction ProcessLegal Framework: The SARFAESI Act, 2002, and related rules govern the enforcement of security interests and recovery of debts.Court's Interpretation: The court scrutinized the bank's actions for fairness and reasonableness, finding no statutory violation or unfairness in the bank's decision to auction the properties.Key Evidence: The bank followed due process in rescinding the OTS and conducting the auction.Application of Law: The court upheld the bank's actions as within its rights under the SARFAESI Act.Competing Arguments: The borrower contended that the bank acted unreasonably, but the court found the bank's actions justified.Conclusion: The bank's decision to proceed with the auction was lawful and justified.Issue 3: Doctrine of Promissory EstoppelLegal Framework: Promissory estoppel is an equitable doctrine that prevents a party from reneging on a promise that the other party has relied upon.Court's Interpretation: The court held that promissory estoppel could not be invoked to alter the terms of a statutory OTS scheme.Key Evidence: The borrower's reliance on promissory estoppel was deemed insufficient to override the contractual obligations.Application of Law: The court found no grounds to apply promissory estoppel in favor of the borrower.Competing Arguments: The borrower's reliance on promissory estoppel was countered by the bank's adherence to statutory guidelines.Conclusion: The doctrine of promissory estoppel did not apply in this case.Issue 4: Locus Standi of Surety and Auction PurchaserLegal Framework: The Indian Contract Act, 1872, outlines the liability of sureties, and the SARFAESI Act governs auction procedures.Court's Interpretation: The court recognized the surety's and auction purchaser's interests in the proceedings, granting them standing to appeal.Key Evidence: The surety's offer to pay a higher amount and the auction purchaser's bid were considered.Application of Law: The court allowed the appeals based on the substantial interests of the surety and auction purchaser.Competing Arguments: The borrower opposed their involvement, but the court found their participation justified.Conclusion: Both the surety and auction purchaser had standing to appeal.Issue 5: Judicial Intervention in Contractual MattersLegal Framework: Articles 226 and 227 of the Constitution of India provide for judicial review of administrative actions.Court's Interpretation: The court emphasized limited judicial intervention in commercial matters unless statutory violations or unfairness are evident.Key Evidence: The bank's actions were found to be within legal bounds and not arbitrary.Application of Law: The court refrained from interfering with the bank's decisions, adhering to principles of limited judicial review.Competing Arguments: The borrower sought judicial intervention, but the court maintained its stance on limited interference.Conclusion: Judicial intervention was not warranted in this case.Issue 6: Potential Misconduct by Bank OfficialsLegal Framework: The Reserve Bank of India Act and the Banking Regulation Act regulate banking operations and oversight.Court's Interpretation: The court noted suspicious conduct by bank officials in handling the OTS and auction processes, warranting investigation.Key Evidence: The disparity between the OTS amount and auction bids raised concerns.Application of Law: The court directed the RBI and Comptroller and Auditor General to investigate potential misconduct.Competing Arguments: The borrower alleged misconduct, which the court found plausible enough to warrant further scrutiny.Conclusion: The court ordered an investigation into the bank officials' conduct.3. SIGNIFICANT HOLDINGSThe court overturned the single judge's decision, dismissing the borrower's writ petition.The auction purchaser's revised offer of Rs. 25.20 crore was accepted, emphasizing the need to secure the best price for public money.The court highlighted the importance of adhering to OTS terms and timelines, underscoring the contractual nature of such agreements.The court recognized the surety's and auction purchaser's rights to appeal, acknowledging their substantial interests in the proceedings.Judicial intervention in banking matters was deemed limited to cases of statutory violations or manifest unfairness.The court ordered an investigation into potential misconduct by bank officials, reflecting concerns over the handling of the OTS and auction processes.In conclusion, the court emphasized the necessity of adhering to contractual obligations under OTS schemes, the limited scope of judicial intervention in banking disputes, and the need for transparency and integrity in bank operations. The judgment underscores the court's role in safeguarding public money and ensuring fair and reasonable conduct by financial institutions.